Value Ideas Blog
Special Situation: CARMAT S.A.
This is a rather unusual post for us, because it’s event-driven. Carmat S.A. is a 2008 founded company that produces advanced biological materials. The founder of the company is the 80 year-old surgeon Alain Carpentier who invented the scientific Carpentier-Edwards ® heart valves in the year 1968, which are the most used in the world. The company describes itself with the words: Carmat S.A. is the designer and developer of the world’s most advanced total artificial heart project, providing an alternative for people suffering from end-stage heart failure. Due to the company this disease currently affects over 100 000 patients in developed countries.   The first implantation of the Carmat S.A. bioprosthetic artificial heart in a human was performed on December 18, 2013 at the Georges Pompidou European Hospital in Paris, by the medical-surgical team headed by Professor Alain Carpentier and consisting of Professors Christian Latrémouille (HEGP), Daniel Duveau (Nantes University Hospital), Bernard Cholley (HEGP) and Doctor Denis Méléard (HEGP). Today the newspaper reported that the first client died 75 days after the surgery. That led to a trading stop of the stock.   Of course, the death of the patient is tragic. But it is quite possible that the market will overlook the fact that the death of the patient is not as bad for the company stock as it looked like on the first second, because the company only calculated a lifespan of 30 days. In the Annual report the company stated: “This is the first of four implantations to be carried out within the framework of the feasibility study. The patients’ 30-day survival data will enable CARMAT to begin an extended pivotal study on 20 to 25 patients this year, in order to submit a CE marking file to the relevant bodies prior to obtaining marketing approval for its device in Europe, in 2015 at the earliest.”   The company is mainly owned by the founder Alain Carpentier (16%), Airbus Group (30%) and the investment fund Truffle Capital (23%). For this reason 69% of the shares are in strong hands and the founder and brain behind the company has a real interest to succeed.   The income statement reads itself like this: “In 2013, CARMAT benefited from operating income of €2.9m, which consisted entirely of Bpifrance subsidies. The Company’s activity brought in no revenue in 2013, as CARMAT’s total artificial heart project is still in its development phase.” “Operating expenses totalled €19.0m over the year, including €13.4m of ‘other purchases and external expenses’.” This was a decrease on the 2012 figure, and corresponds to the major developments recorded in 2013 that notably led to the first-in-man implantation of the CARMAT heart. Once a Research Tax Credit of approximately €1.8m is taken into account, the 2013 annual net loss came to €14.6m, an improvement on the 2012 figure of €17.2m.”   The Bpifrance payments of €5.7m consists of €0.16m in subsidies and €5.5m in repayable advances.   The interesting thing is that the product and therefore the company has two important moat effects: Huge switching costs and economies of scale. Economies of scale exist due to the fact that a great part of the costs for the production of an artificial heart lie in the research and development costs and time, which are protected by patent law. As an example Carmat has signed clinical cooperation agreements with and agreements with international cardiac surgery centres. The training at these centres is currently benefitting from feedback from the feasibility study currently being carried out in France. The training process is also the reason for high switching costs; the product is relatively unique and doctors have an extremely high incentive of developing a high competence, for the operation is critical for patients lives. Also, while the doctor chooses the product, the patient (or their insurance) has to pay, leaving switching incentives low.   You can find a good explanation of the risks on page 14 of the IPO prospectus: “If the Company succeeds in obtaining CE Marking in the European Union and PMA from the FDA in the United  States for the CARMAT total artificial heart, thus enabling it to market its total artificial heart, it may take time  to secure the backing of the medical community, especially cardiologists, cardiac surgeons and third-party  payers.   Market acceptance (and profitability) of the totally artificial heart depends on a number of factors:
  • the medical profession’s perception of the therapeutic benefit of the total artificial heart;
  • the number of establishments likely to carry out these artificial heart implant operations;
  • the process and the quality of the training of cardiac surgeons, who need to master a new surgical technique;
  • the cost of the treatment;
  • the healthcare payment policies of governments and other third parties;
  • the effective implementation of a publicity strategy, and
  • the support of recognized experts
  Having covered the risk we should also look at the upside potential: On the question on how much the clinical trial costs, the company answers: “Health economics data will be collected at a later time. Furthermore, as for heart transplants, the cost varies for each country, hospital or even patient. It depends on a number of factors, and notably the given timeframe before and after the implant. The cost of the time spent on the waiting list with repeated hospital admissions, for example, or the cost of treating a cancer of the lymphatic system resulting from immunosuppressor therapy. In the United States, a study estimates an average cost at $997,000 taking into account only the 30 days prior to and 180 days following the operation.”   carmat carmat2   This means that right now, just very few compatible patients would be able to afford treatment which could change with growing scale and sinking cost. Analysts estimate the costs per artificial heart provided by Carmat about 140.000 and 180.000 Euro. Finally, Carmat also owns 134 national patents and has 63 patent applications running. If it manages to enhance its product and make it accessible to the market, Carmat could well be a gold-mine.   Obviously, we need to add that the future of the company and its environment is extremely uncertain. We neither recommend any buying or selling activity, nor do we think that we are capable of pricing the stock. Also, there are definitely ethical concerns in many ways when it comes to giving a longer life a price tag. On the other hand, we definitely think it is an outstandingly interesting situation worth staying up to date with.


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